Many problems with governor’s tax proposal

Gov. Mary Fallin’s recent tax proposal is virtually identical to one espoused in 2000 by then-Gov. Frank Keating and later by Steve Largent in the 2002 governor’s race. Their proposal was to eliminate the state income tax and the sales tax on groceries and replace them with a tax on services. It is worth noting that Keating’s idea was rejected after finding virtually no support among our citizens. Largent, carrying the same torch, lost to Brad Henry who campaigned against their tax platform.

During the past 17 years, the state has convened two citizen/legislative task forces to consider this idea, with neither recommending adoption. To those new to this seemingly endless soap opera, let me bring you up to date. I will reference a piece I wrote for the Legislature in 2000 called “Thirteen Problems with Replacing the State Income Tax with a Tax on Services.”

A tax on “services” is implicitly a tax on the wages of blue collar workers and professionals. It is also a special tax on the rent these hardworking individuals pay for houses, apartments, office space and retail shops along with the utilities to make them habitable. No wonder its lack of support among the broader electorate. The $500,000 salary of an oil company executive is not considered a “service,” which may explain their club’s almost universal support of the idea.

The bone to the poor on the grocery tax is a mirage. First of all, the poorest 15 percent get food stamps; also, don’t oil company executives eat food from grocery stores?

No matter what your views on the equity of the tax, its implementation has some serious drawbacks. Since 1986, state income taxes are deductible expenses in calculating federal income tax; sales taxes are not. Replacing the income tax with a tax on services would cost Oklahoma taxpayers an additional $500 million annually in federal income taxes. Whatever sales taxes the state levies, cities are allowed to follow suit; hence replacement of the state income tax with a sales tax might yield a $3.3 billion tax increase from local governments.

Since the state tax return takes figures from the federal return, most accountants having prepared the federal return will submit the state return at no cost. The federal government employs an army of IRS agents to assure compliance with the income tax, relieving the state of most of the cost of enforcement. The new tax on services will require a plethora of forms, requiring endless hours of tax preparation by affected citizens and a costly state bureaucracy to assure compliance.

Imposition of the services tax often leads to multiple taxation of the same service, causing businesses to engage in economically inefficient vertical integration to avoid taxation. This in turn gives large corporations, which provide most services in-house, to avoid taxation altogether, widening their competitive edge with small business.

These are but a few of the myriad problems associated with this proposal. The governor should look elsewhere for additional revenue.